Question About Futures Premium

Member

To IvanBoresky---
A small Qs.----if answered ---I will learn a lot----
SBI-NOV24FUT----was going at a premium of 2---3Rs. from SBI spot for most of the day---but towards the very end it for a few a few minutes it went in discount---and then just ended above the spot price-----though both the Spot and Fut prices -----were simulteneously increasing----
What does it imply----
1)A overbought condition?
2) A fear factor creeping in?
3)If Monday ---NIFTY opens a low----then SBI is bound to fall?-
IF any other conditions----beyond these------r there----then----if u kindy discuss them with reasoning----I will be obliged---
Regards,
joy_mitali

Member

To IvanBoresky---
A small Qs.----if answered ---I will learn a lot----
SBI-NOV24FUT----was going at a premium of 2---3Rs. from SBI spot for most of the day---but towards the very end it for a few a few minutes it went in discount---and then just ended above the spot price-----though both the Spot and Fut prices -----were simulteneously increasing----
What does it imply----
1)A overbought condition?
2) A fear factor creeping in?
3)If Monday ---NIFTY opens a low----then SBI is bound to fall?-
IF any other conditions----beyond these------r there----then----if u kindy discuss them with reasoning----I will be obliged---
Regards,
joy_mitali

Here is my take on it based on the price action that you have described (and I stand corrected).

This could suggest one of the following possible scenarios:

a) that someone who is holding a large chunk of SBI stock either locked their profits by selling the futures and the futures prices dropped.
b) or may be they were possibly feeling uncomfortable about Monday price action (may be some inside information) and they hedged their long cash position by selling futures.
c) or some large arbitrageur decided that the cash/futures premium was simply mispriced and sold the futures and bought the cash lowering the premium may be even taking it temporarily to slightly negative territory - and closed out the position near the close netting a couple of rupees profit in the process - and also taking the premium from a negative territory to either breakeven or slightly positive territory to cash.

But a reduction in premium such as this would indicate the action of a large operator or an arbitrageur (as this happened so quickly near the end), because SBI is a liquid stock and is traded well on the exchanges.

As for your question about NIFTY opening low on Monday whether SBI stock would fall - the simple answer is I do not know.

However I do watch what is called Cash/Futures Divergence what this simply means is that both the markets start trading in opposite direction - or one market just simply does not respond to the move in the other market - so for eg. in this case the SBI cash stock may start heading North - but the futures either does not respond and stays where it is or sometimes it may even start heading South (it can be vice versa also) - this is a very interesting time to be in the market (obviously after careful analysis of the market) I have found such Divergences very rewarding to trade from time to time - combined with other divergence indicators. They are like lights flashing before the ringing of alarm bells when many people would start noticing them.

Member

Hello Nautilus,
Thanks a lot---for the need ful clarification----I was also thinking ---a part in ur direction---but had not considered all the possibilities---I feel ---with a exceptional closing on Friday---market can have any of the extreme openings-----But if it just persists with a mere pluss of 10--12 pts---for about an hour--then the chance is that---market may shed---around 25---30 points by tomorrow's ending----
SBI 820PUT may be an interesting possibility----considering the fact that it has fallen morethan 50% ---on Friday---as is at a damm low price---
SATYAM 620PUT---will be also another ineresting prospect tomorrow---
NIFTY 2520PE---had fallen more than 65% on Friday----
All r interesting possibilities---
A request again to Nautilius,
IF u can show ---how to trade in Cash/Future Divergence----in the most liquid stks---or Nifty---The forum members wil al be benifitted---
Regards,
joy-mitali

Active Member

Sorry for the late reply. Just saw your post joy_mitali. Nautilius explained it perfectly. I dont think it could be arbitrage coz a 2-3 rupee spread on the SBI stock would not justify arbitrage. Its most probably a hedging action, coz with the prices rising its not likely that a speculator would have sold the futures of a size large enough to take the futures into a discount.

Member

Hello Nautilus,
A request again to Nautilius,
IF u can show ---how to trade in Cash/Future Divergence----in the most liquid stks---or Nifty---The forum members wil al be benifitted---
Regards,
joy-mitali